7 Dec 2012

Inflation goal drives decision to hold OCR

7:34 am on 7 December 2012

An economist says Reserve Bank Governor Graeme Wheeler's focus on keeping inflation close to 2% appears to be behind his decision so far to keep the Official Cash Rate on hold when the last governor may have cut.

The interest rate was kept on Thursday at 2.5%, where it was set in March last year.

The Reserve Bank's Policy Target Agreement with the Government sets out the inflation target range to be between 1% - 3%, but with a focus at the mid-point.

Mr Wheeler said the bank's outlook is for the OCR to remain stable until 2014. He said pockets of pricing pressures are beginning to emerge, mostly as a result of the strengthening housing market, but believes house price inflation will start to moderate.

BNZ head of research Stephen Topliss said the Monetary Policy Statement shows that Mr Wheeler is determined to keep inflation at the agreed mid-point.

"I think that commit to 2% in part is one of the reasons why he wouldn't contemplate lowering interest rates at the moment when perhaps, and I say just perhaps, Alan Bollard might have."

Mr Topliss said it's good to have an inflation target that is anchored and that commitment to a 2% target applies equally if inflation starts dropping.

He said Mr Wheeler appeared to dismiss negative information.

"If there was a surprise it was that it was just dismissed rather than perhaps leading to the possibility of a rate cut."

Mr Topliss said the general forecasts for inflation are that it is extraordinarily low now and that it will gradually move northward.